CareTrust REIT: The 11% Dividend Raise Is Music To My Ears
Summary
- CareTrust is a growing skilled-nursing landlord with solid debt metrics and a strong base of operators.
- Management has been proactive in helping its operators address the COVID-19 crisis.
- With plenty of balance sheet flexibility, CareTrust can weather this crisis and continue growing in the near term.
Investment Thesis
CareTrust REIT (NYSE:CTRE) has seen its share of volatility over the past three months, hitting a multi-year low before recovering to the current price of $19.33 as of writing. While there has been plenty of headline risk surrounding skilled nursing facilities and seniors housing, CareTrust has managed this environment well with a relatively low infection rate in its facilities. With an active pipeline, solid debt metrics, and low payout ratio, I believe CareTrust shares are undervalued and offer compelling forward value as it returns to growth mode.
Brief Overview
CareTrust REIT is a healthcare property landlord with a geographically diversified portfolio of 212 properties spread across 28 states and 23 operators with triple-net leases in place. As of 3/31/20, the company had over $1.7 billion in property investments in skilled nursing facilities, Assisted Living Facilities and Independent Living Facilities, and Campuses that are comprised of SNF + ALF combined.
Currently, skilled nursing facilities make up 71% of the overall portfolio, while Assisted/Independent Living and Campuses make up the rest. Texas and California have the most properties with 39 and 34, respectively.
Source: Company Website
Quarterly Results
CareTrust REIT had a decent Q1 with FFO of $0.34 per share, representing a solid 6.3% YoY growth per share and reflecting the health of the overall portfolio. While there has been plenty of headline risk surrounding skilled nursing, things are not nearly as bad as they appear on the surface. With occupancy being the most relevant metric, the CEO did note on the conference call that overall occupancy had declined 370 bps in April due to a deferral of elective surgeries and fewer short-term Medicare patients a result. However, long-term Medicaid residents make up the bulk of CareTrust's SNF residents at 75% of total occupancy.
In addition, the government has waived the three-day hospital stay qualifying rule for Medicaid residents to be eligible for Medicare skilled services, which means that their SNF residents could qualify for higher Medicare rate skilled services without going to the hospital. This resulted in a higher margin skilled occupancy increase of 240 bps, thereby providing additional revenue to offset the occupancy cost. Further, a substantial number of the company's tenants have received or are expected to receive assistance from the $100 billion fund set aside for healthcare providers under the CARES Act, helping to ensure their ability to serve patients.
CareTrust's operators seem to be managing the COVID-19 crisis well, with only 29 facilities (13.6% of the portfolio) having at least one positive COVID-19 case. CEO Greg Stapley addressed that the headline risk associated with COVID-19 in SNF's is not representative of most cases during the conference call:
In a minority of cases, we've seen the virus spread like wildfire resulting in multiple COVID-related fatalities. Those relatively few cases are the ones that make the news. However, in most cases, operators are able to contain and isolate and successfully care for the COVID patients in the facilities, only sending out to the hospitals the most critical patients, usually only those requiring ventilators.
It's also encouraging to see that the CareTrust's management as the landlord has been proactive in getting supplies to its operators, as the CEO noted on the conference call:
We leveraged our portfolio size to get the attention of the supplier and placed a seven figure order in behalf of our operators. Not only did they get more PPE and get it sooner, we estimate that our bulk order resulted in roughly $2 million of combined savings for our smaller tenants. This week, we're working on another order of PPE for them.
The company collected virtually all of its May rent with a collection rate over 99% and tenants appear to be healthy overall with only one Top 10 operator with 8 properties that had EBITDAR coverage under 1.0.
Source: Q1'20 Investor Presentation
Management was confident enough with their business that it raised the dividend by 11% from 0.225 per share to 0.25 per share. The payout ratio sits at a comfortable 73% with plenty of cushion to buffer against headwinds.
This dividend increase was especially welcomed news given that many of CareTrust's peers have either suspended or cut their dividends. For comparison, Ventas (VTR) has suspended dividends until at least June, with a possible cut coming, and Welltower (WELL) has already cut their dividends by 30%. CareTrust has a solid track of increasing dividends, having grown it by 35% since the end of 2017.
Source: Q1'20 Investor Presentation
Balance Sheet & Lease Maturities
CareTrust ended the quarter in a strong liquidity position with $45 million in cash on hand and $525 million of available capacity under its revolving line of credit. The company also generates $10 million of cash per quarter after paying the increased dividend, which will help it to fund the current $100 million to $125 million in the pipeline that management projects. CareTrust also has excellent debt metrics with a Net Debt to EBITDA that is well within safe range at just 3.5x after much deleveraging since 2018, and a Net Debt to Enterprise Value of only 28%.
Source: Q1'20 Investor Presentation
It's also good to see that the company has well-staggered lease maturities with no near-term maturities until 2026 and only between 3% and 5% of leases expiring through 2028.
Source: Q1'20 Investor Presentation
Key Risks
The key risk for CareTrust has long been its concentration of Ensign operated properties since its spinoff into an independent REIT. The company, currently, has 85 properties operated by Ensign representing 40% of its total properties. Management has done a good job of diversifying away from this concentration over the years, and it doesn't hurt that Ensign is a top-notch operator with high rent coverage ratios.
As with all skilled nursing landlords, operator rent coverage and the government pay model will always be something management to closely monitor. However, this is the nature of the business, and CareTrust has a solid base of tenants led by Ensign with healthy coverage ratios. In addition, I believe the new Patient-Driven Payment Model will help drive operator profitability with a focus on a patient-centered reimbursement model with the aim of reducing non-value-added activities.
Summary
CareTrust has been a reliably solid and growing senior healthcare landlord over the years. While COVID-19 has provided occupancy and operational headwinds, the company's strong liquidity position combined with additional government support will help the company weather this crisis. In addition, management has shown a willingness to be hands-on and proactive in supporting their operator relationships. I believe the company can and will return to growth mode after this pandemic eases.
I believe CTRE shares are, currently, undervalued at the current price of $19.33 at a 14.9 P/FFO and have a price target of $21.4 at an estimated 16.5 P/FFO given that I anticipate the company will return to growth mode in the next couple of quarters.
This article was written by
I am Gen Alpha. I have more than 14 years of investment experience, and an MBA in Finance. I focus on stocks that are more defensive in nature, with a medium- to long-term horizon.
I provide high-yield, dividend growth investment ideas in the investing group Hoya Capital Income Builder. The group helps investors achieve dependable monthly income, portfolio diversification, and inflation hedging. It provides investment research on REITs, ETFs, closed-end funds, preferreds, and dividend champions across asset classes. It offers income-focused portfolios targeting dividend yields up to 10%. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CTRE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (2)
